Union Budget 2019 India: The gold loan sector has been at the forefront of the Indian government’s effort to bring more people into the ambit of formal finance.
By V P Nandakumar
Union Budget 2019 India: The gold loan sector has been at the forefront of the Indian government’s effort to bring more people into the ambit of formal finance. Besides, the industry also contributes to the monetisation of India’s vast stock of private gold through the credit route. The gold loan is typically a small ticket loan, often given to customers in a rural or semi-urban area, against their household jewellery. These loans are taken by people who don’t have access to any other form of formal credit. At Manappuram Finance Limited, for instance, almost two-thirds of our loans against gold are microloans of amounts less than Rs 50,000.
And yet, even as India sits atop the largest stockpile of privately held gold in the world, there are some roadblocks which prevent the industry from contributing its full might to the economy. What should the government and the regulators do to ease the way? Here are a couple of suggestions which can be considered in the forthcoming budget.
Introduction of risk weights based mechanism to replace the LTV cap
At present, the Gold loan companies can lend only up to 75 percent of the value of Gold in jewellery. To a borrower holding a meagre quantity of gold, a cap on the maximum loan he can avail is counterproductive. It also goes against the government’s stated mission of furthering financial inclusion. The unorganised sector, which faces no such restriction, is winning back marginal borrowers with the promise of higher loan to value (LTV).
Instead, regulations should enable households to monetise their gold assets more fully by doing away with the LTV cap. We suggest putting in place a risk weight mechanism to allow well-capitalised NBFCs to extend credit without any LTV cap. This will discourage marginal borrowers from being lured to informal sources and nudge them back towards the formal sector. The higher risk weighted capital requirements for lending at higher LTV will act as a safeguard against reckless lending.
An artificial cap on LTV tilts the playing field in favour of unorganised lenders. It denies established players in the regulated industry a legitimate opportunity to capitalise on their experience, economies of scale, capital adequacy and risk management practices. Risk weights should account for the inherent default risk and recovery value post-default. The time is ripe to move from standardised risk-based methods (that do not adequately consider the differences in inherent risks) towards prudential risk management practices.
Restoration of priority sector status to eligible gold loans
Gold loans had previously enjoyed priority sector lending (PSL) status. Now when the government looks to increase mobilisation of privately held gold and improve access to credit for MSMEs and micro enterprises dwindles, it would be prudent to restore the PSL status. An average Gold loan customer borrows against household jewels for a short period keeping as little as 20 grams of gold in collateral. This customer may be a farmer, micro-entrepreneur or shopkeeper looking to meet their seasonal requirements of working capital or any other need, for which banks do not have a product.
A large proportion of gold loans are given out to MSMEs for their short-term working capital requirements. Gold loan against household jewellery is one of the most common and prevalent sources of funds for MSMEs. While gold loans given to farmers by banks gets classified as priority sector lending, gold loans by the NBFCs do not receive such benefits. Removal of this anomaly by making all micro gold loans (i.e. under Rs. 50,000) eligible for priority sector lending status would enable us to monetise the dormant household gold.
Of the estimated 25,000 to 30,000 tonnes of household gold in India, the formal sector has been able to monetise only about 500 tonnes. There is a massive opportunity for gold loan NBFCs to grow the business significantly and in the process help the government reduce its current account deficit.
The author is MD &CEO Manappuram Finance. The views expressed are the author’s own.